TREASURY INSPECTOR GENERAL FOR TAX
ADMINISTRATION

Plans Exist to Engage the Tax Preparer Community in
Reducing the Tax Gap; However, Enhancements Are Needed

June 10, 2010

Reference Number:2010-30-061

This
report has cleared the Treasury Inspector General for Tax Administration disclosure
review process and information determined to be restricted from public release
has been redacted from this document.

Phone Number |202-622-6500

Email Address |inquiries@tigta.treas.gov

Web Site|http://www.tigta.gov

HIGHLIGHTS

Plans Exist to Engage the Tax Preparer Community in Reducing the Tax
Gap; However, Enhancements Are Needed

Highlights

Final
Report issued on June 10, 2010

Highlights of Reference
Number:2010-30-061 to the Internal
Revenue Service Deputy Commissioner forServices and Enforcement and the Chief Financial Officer.

IMPACT ON TAXPAYERS

Paid preparers prepare more than half of all individual tax
returns filed and have a great deal of influence on taxpayer compliance
levels.Because most taxpayers use
preparers to file their tax returns, adherence to standards and the preparation
of accurate tax returns have a significant effect on taxpayer compliance and
the Internal Revenue Service’s (IRS) efforts to reduce the tax gap.

WHY TIGTA DID THE AUDIT

The individual income tax is the largest single source of
Federal receipts and comprises over 71 percent of the tax gap.TIGTA initiated this review to evaluate the IRS’
efforts to engage the tax practitioner community in a productive partnership to
reduce the tax gap.

WHAT
TIGTA FOUND

The IRS has taken actions to engage the tax preparer
community that could affect tax administration and reduce the tax gap.The IRS developed a Fiscal Years 2009–2013 Strategic Plan to improve
oversight of tax administration.It includes
two key objectives and several strategies that pertain to reducing the tax gap
by engaging the tax preparer community.However,
actions were not taken to ensure previously omitted key components were
included in the existing IRS Strategic Plan.Without these components, it is unclear how the IRS will effectively
monitor its performance and adherence to the requirements for strategic plans.

The IRS’ Strategic Plan is supported by plans from 10
business divisions and functional offices, with numerous goals and activities to
strengthen the partnership with tax practitioners.Additionally, in June 2009, the IRS Commissioner
launched the Return Preparer Review, which supports the Strategic Plan to
enhance compliance standards for tax preparers.The Review resulted in a report issued on January 4, 2010, that contained
eight recommendations, including mandatory tax return preparer registration and
competency examination requirements for tax preparers.

Our review found that the IRS’ Strategic Plan does not
contain sufficient measures that will be useful for monitoring its performance
in achieving its goals and objectives to engage the paid preparer community.Also, the plans of the IRS business divisions
and functional offices did not always include outcome measures, baselines, or
targets that could be used to measure whether actions taken would achieve
desired objectives in the Strategic Plan.

WHAT TIGTA RECOMMENDED

TIGTA
recommended that the Chief Financial Officer 1) take steps to update the existing
IRS Strategic Plan and ensure future strategic plans have all key components
and 2) define and include in the Strategic Plan sufficient measures that will
provide data that can be used to monitor the IRS’ efforts to achieve objectives
aimed at strengthening partnerships with tax practitioners and paid preparers
to ensure effective tax administration.

IRS
officials agreed with our recommendations; however, the planned corrective
actions did not address updating the existing Strategic Plan with omitted key
components and sufficient measures to monitor the IRS’ efforts regarding the
paid preparer community.

TIGTA
continues to believe the existing Strategic Plan should be updated to ensure
the IRS is compliant with the Government Performance and Results Act of
1993.In addition, without an effective
process to monitor its performance, the IRS cannot ensure its programs are
achieving their objectives and desired outcomes.

This report presents the results
of our review to evaluate the Internal Revenue Service’s (IRS) efforts to
engage the tax practitioner community in a productive partnership to reduce the
tax gap.[1]The audit was conducted as part of our Fiscal
Year 2010 Annual Audit Plan and addresses the major management challenge of Tax
Compliance Initiatives.

Management’s complete response to the draft report is
included as Appendix VI.

Copies of this report are also being sent to the IRS
managers affected by the report recommendations.

Please
contact me at (202) 622-6510 if you have questions or Margaret E. Begg,
Assistant Inspector General for Audit (Compliance and Enforcement Operations),
at (202) 622-8510.

Paid
preparers can be self-employed or may work for accounting firms, large tax
preparation services, or law firms and include the following:

·Licensed professionals,
such as attorneys and Certified Public Accountants.These licensed professionals are regulated
by the State licensing authority.

·Enrolled agents.These professionals pass an IRS examination
or present evidence of qualifying experience as a former IRS employee and
have been issued an enrollment card.Enrolled agents are the only taxpayer representatives who receive
their right to practice from the Federal Government.

·Unenrolled or
unlicensed preparers.These
individuals range from those who might receive extensive training to those
with little or no training.Currently,
only three States—California, Maryland, and Oregon—have
requirements for unenrolled paid preparers.In these States, unenrolled paid preparers must register with State
agencies and meet continuing education requirements.

The United
States has one of the highest tax compliance
rates in the world at 83.7 percent.However, each percentage point of noncompliance costs the Federal
Government approximately $21 billion, which equates to more than $342 billion
in annual lost revenue.On an annual
basis, more than half of all taxpayers
pay someone else to prepare their income tax returns.In Calendar Year 2009, the Internal Revenue Service (IRS) processed approximately
86 million individual Federal income tax returns
prepared by paid preparers.This activity is down by less than
5 percent from the nearly 90.4 million tax returns prepared by paid
preparers in Calendar Year 2008, but is still more than half of all individual
taxpayers who filed a tax return.Taxpayers
are ultimately responsible for the information reported on their tax
returns.However, there are no existing national standards that
a preparer is required to satisfy before selling tax preparation services
to the public.Anyone, regardless of
training, experience, skill, or knowledge, is allowed to prepare Federal income
tax returns for others for a fee.

The individual income tax is the largest single source of
Federal receipts, and tax practitioners
have a great deal of influence to ensure taxpayers comply with tax laws. The individual income tax comprises over 71
percent of the $345 billion gross tax gap.[2]

Since
2006, the Department of the Treasury and the IRS Oversight Board (hereafter
referred to as the Board) have developed strategies to address
noncompliance.The Department of the Treasury
Office of Tax Policy issued A
Comprehensive Strategy for Reducing the Tax Gap that referenced
coordination with partners and stakeholders.

It
suggested that:

Closer coordination is needed between the IRS
and State and Foreign Governments to share information and compliance
strategies.Closer coordination also is
needed with practitioner organizations, including bar and accounting
associations, to maintain and improve mechanisms to ensure that advisors
provide appropriate tax advice.Through
contacts with practitioner organizations, the Department of the Treasury and
IRS learn about recent developments in tax practice and hear directly from
practitioners about taxpayer concerns and potentially abusive practices.

In its Fiscal Year (FY) 2006 Annual Report, the Board
recommended six interrelated strategies that it believed would reduce the tax
gap.The strategies included simplifying
the tax code, improving information reporting and enforcement tools to address
underreporting of income, improving customer service, and creating a more
productive partnership between the IRS and the tax preparer community.

In its FY 2008 Annual Report, the Board reported that the
tax gap was a serious systemic weakness that must be addressed and is a real
cost to taxpayers.The Annual Report stated
that the tax gap, which is unacceptably high, deprives the nation and its
people of $290 billion in tax revenue each year that should be collected.The report further stated that if the tax gap
was zero, the Federal Government would have additional revenue each year that
it could either spend on programs or refund to taxpayers.

The review was performed at the IRS National Headquarters in
Washington, D.C., in the Office of Appeals, Criminal Investigation Division,
Large and Mid-Size Business Division, Tax Exempt and Government Entities
Division, Office of Professional Responsibility, and Taxpayer Advocate Service;
the National Headquarters in New Carrollton, Maryland, for the Small
Business/Self-Employed Division; and the National Headquarters in Atlanta,
Georgia, for the Wage and Investment Division during the period May 2009
through January 2010.We conducted this
performance audit in accordance with generally accepted government auditing
standards.Those standards require that
we plan and perform the audit to obtain sufficient, appropriate evidence to
provide a reasonable basis for our findings and conclusions based on our audit
objective.We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions based on
our audit objective.Detailed
information on our audit objective, scope, and methodology are presented in
Appendix I.Major contributors to the
report are listed in Appendix II.

Because
more than half of all tax returns filed are prepared by paid preparers, tax
return preparers have a significant effect on taxpayer compliance.In January 2008, Senate Finance Committee
Chairman Max Baucus, Democrat-Montana, expressed his concern with the tax gap
at Douglas Shulman’s nomination hearing to become the 47th IRS
Commissioner.Mr. Shulman agreed that
the tax gap was a significant problem and stated he was 100 percent committed
to working toward increasing compliance and closing the tax gap.

The IRS developed a
strategic plan to improve oversight of tax administration

During FY 2008, the IRS, the Department of
the Treasury, the Board, and a consulting firm identified emerging trends
affecting tax administration.A key
trend identified included the expanding role of tax practitioners and other
third parties in the tax system.The
IRS Commissioner and his executives used these trends to develop a Strategic
Plan outline, which was shared with IRS senior management in August 2008.

The
Board, which is responsible for approving the Strategic Plan, worked with the
IRS to update the Strategic Plan for FYs 2009–2013.The Board approved the IRS plan in April 2009.It includes two overall goals related to
achieving the IRS’ mission:

Goal 1 – Improve service to make voluntary compliance
easier.

Goal 2 – Enforce the law to ensure everyone meets their obligation
to pay taxes.

The
IRS identified 10 key objectives for both goals—two pertain to reducing the tax
gap by engaging the tax community and include the approach to accomplish the objectives.Specifically:

Goal 1, Objective 4:Strengthen partnerships with tax
practitioners, tax preparers, and other third parties in order to ensure
effective tax administration.

2.Treat partners as the “first line of compliance” by providing
them with the tools and information to encourage taxpayer compliance and
prevent mistakes.

Goal 2, Objective 6:Ensure that all tax practitioners, tax
preparers, and other third parties in the tax system adhere to professional
standards and follow the law.

Strategy:

1.Develop and implement a coordinated
preparer plan across the IRS and the preparer community.

2.Administer a fair, diligent, and
effective system of sanctions and penalties for those who fail to follow the
law.

3.Leverage research to identify fraudulent
return preparers and other areas of abuse and noncompliance by return
preparers.

Actions were not taken to ensure previously omitted key
components were included in the strategic plan

In FY 2007, the Treasury Inspector General for Tax
Administration (TIGTA) reported[3]
that the IRS’ FYs 2005–2009 Strategic Plan did not have all of the information
required to be included in its plan.The
IRS agreed with our recommendations, and the office of the Chief Financial
Officer[4]
planned to take corrective actions by April 15, 2008, to ensure future
strategic plans included the following:

A timetable/schedule
for future program evaluations.

A list
of major management challenges and high-risk areas.

A description
of consultations conducted with Congress to develop the Strategic Plan.

Information
on how or where to send comments or questions.

Review of the existing IRS Strategic Plan showed only 1 (25
percent) of the planned corrective actions was implemented.For the remaining three, one was not
addressed, one was partially completed, and there was not sufficient
documentation to support that the remaining action was implemented. IRS personnel stated that the lack of timely
implementation on the corrective actions occurred for the following reasons: 1) the timetable/schedule was not included
because they are expecting a revamping of the Performance Assessment Rating
Tool;[5]
2) a request was made for Congress to provide input, but the IRS did not
receive a response; and 3) they did not have a reason for not clearly providing
instructions for taxpayers to provide comments.We followed up with the appropriate personnel in the Office of
Management and Budget and they confirmed that the IRS is still required to
measure and gather data while the Performance Assessment Rating Tool is being
revamped.In addition, documentation was
not available for us to review and confirm that Congress was asked to provide
input on the Strategic Plan.

Without these components, it is unclear how the IRS will
effectively monitor its performance and adherence to the requirements for
strategic plans.The Government
Accountability Office guidance regarding audit recommendations suggests that
management is responsible for implementing recommendations made to Federal Government
agencies.

Ten business divisions and functional offices created individual
plans to support the strategic plan

Workshops
with senior IRS management and executives were held to discuss and identify
ways to align the Strategic Plan’s goals and objectives with the business
operating divisions and functional offices’ processes.We discussed these efforts with IRS personnel
and determined this task was accomplished by:

Providing input and key
priorities to their respective offices.

Identifying external
factors such as laws and economic changes that affect taxpayers and the
IRS processes.Examples of economic
changes that have an impact on IRS operations include unemployment rates
and the housing market.

Each IRS
business division and functional office developed plans that showed goals,
programs, and activities to support the IRS’ two key objectives aimed at the
tax preparer community.

Each business division and functional office developed
annual multi-year plans and program letters (hereafter referred to as
functional plans).A review of the
functional plans showed the goals, programs, and activities were consistent and
supported the IRS’ objectives to strengthen the partnership with tax
practitioners to ensure an effective tax administration and to ensure that all
tax practitioners adhere to professional standards and follow the law.For example, the Taxpayer Advocate Service
plan includes a goal to explore the role of preparers in bringing taxpayers
into compliance by identifying the types and causes of preparer errors and the
role of preparers in facilitating noncompliance.In addition, business units and functional
offices took the following steps to engage the tax practitioners:

·Conducted
workshops with tax professionals from Federal advisory committees such as the
Information Reporting Program Advisory Committee, the IRS Advisory Committee,
and the American Institute of Certified Public Accountants to develop scenarios
and testing protocol to study preparer work processes.

·Completed
a research study on the role of preparers in relation to taxpayer compliance
with Internal Revenue Laws.

·Initiated
a Preparer Penalty Program to address the following two primary preparer
penalties:

See
Appendix IV for examples of goals, programs, and activities from all 10
business divisions and functional offices.

Recommendation

Recommendation
1: The Chief Financial
Officer should take steps to update the existing IRS Strategic
Plan and ensure future strategic plans have all of the information in the plans
as required by the Government Performance and Results Act of 1993[6]
and Office of Management and Budget Circular A-11 (Preparation, Submission, and Execution of the Budget).

Management’s
Response:
IRS management agreed with this recommendation and will
ensure future strategic plans incorporate the requirements in Department of the
Treasury guidance, which includes both the Government Performance and Results
Act of 1993 and Circular A-11.

Office of Audit Comment:While
IRS management agreed with our recommendation, the IRS did not address
modifying its existing Strategic Plan to include omitted key components required
by the Department of the Treasury. We
previously reported these omissions during our 2007 review, and the IRS
responded it would ensure consistency with Treasury guidance in developing its
next strategic plan.However, the current
management response is similar to the IRS’ 2007 response, and we continue to
believe the existing Strategic Plan should be updated to ensure the IRS is
compliant with the Government Performance and Results Acts of 1993.We followed up with IRS management to provide
them an opportunity to reconsider their response; however, we were advised that
their position remained the same.

In
June 2009, the IRS Commissioner launched a Return Preparer Review (hereafter also
referred to as the Review).The goal of
the Review is to help the IRS better leverage the tax return preparer community
to increase taxpayer compliance and ensure uniform and high ethical standards
of conduct for tax preparers.The Review
team was led by the Deputy Commissioner for Operations Support and included
senior IRS executives, a designated project manager, and a team of IRS
employees.

From
June to December 2009, the IRS conducted three public forums with various
members of the preparer community and other stakeholders to obtain input on how
to meet its objectives.Participants who
attended the forums included the Government Accountability Office, TIGTA,
selected States,[7]
software developers, independent tax preparers, IRS employees, and
taxpayers.The IRS received more than
1,050 comments from the public and its employees on specific questions
regarding tax preparer activities.A
review of the responses showed 53 percent of respondents were in favor of the
IRS providing improved oversight and enforcement of tax practitioners and the
tax preparer community, while only 42 percent were in favor of a proposed
requirement to register all preparers. Some offered methodologies to improve the
oversight and enforcement, and others questioned how the IRS would enforce
control standards such as signing tax returns for tax professionals and paid
preparers who use off-the-shelf tax software.All comments are available for review on the IRS’ website (IRS.gov).

The
expected outcome of the Return Preparer Review was to propose a comprehensive set of recommendations for the IRS Commissioner
to provide to the Secretary of the Treasury and the President by December
2009.On January 4, 2010, the
Commissioner issued the Return Preparer Review (Publication 4832), which included
eight recommendations.Figure 1 reflects
a brief description of the eight Review recommendations.

Figure
1:Return Preparer Review
Recommendations

Recommendations

Description of
Recommendations

Mandatory Tax Return
Preparer Registration

All individuals
required to sign a Federal tax return as a paid tax return preparer will be
required to register and obtain a preparer tax identification number.The registration will be effective for a 3-year
period and requires tax return preparers to renew their registration every 3 years.

Competency Examination
Requirements

All paid tax return
preparers required to register with the IRS who are not attorneys, certified
public accountants, or enrolled agents will be required to take a competency
test.

Continuing Professional
Education

All paid tax preparers
who are required to register will be required to take
15 hours of annual continuing professional education, including 3 hours of
Federal tax law updates, 2 hours of tax preparer ethics, and 10 hours of
Federal tax law topics.Attorneys,
certified public accountants, enrolled agents, or others enrolled to practice
before the IRS will be excluded because these individuals generally must
complete continuing education requirements to retain their professional
credentials.

Ethical Standards

All signing and
nonsigning tax return preparers will be placed under Department of the
Treasury Circular 230.[8]

Tax Return Preparer
Enforcement

The IRS plans to
implement a comprehensive enforcement strategy that includes applying
significant examination and collection resources to tax return preparer
compliance.

Tax Return Preparation
Software

The IRS plans to
establish a task force that will seek the input of the tax preparation
software industry, State Government representatives, and other relevant
stakeholders to address identified risks associated with the dependence of
tax administration on consumer and commercial tax preparation software and
discuss the possibility of establishing industry standards.

Refund Settlement
Products

The IRS plans to
convene a working group to review the refund settlement product
industry.Part of this review will
include analyzing opportunities to improve refund delivery options.

Public Awareness and
Service Enhancements

The IRS plans to
develop a public awareness campaign to educate taxpayers, paid tax return
preparers, and IRS employees about the new standards and requirements for tax
return preparers.In addition, the IRS
will develop a searchable database of tax return preparers who have
registered and passed the competency examination.

Source:The IRS
Return Preparer Review Report dated January 4, 2010.

The IRS did not provide any time periods for implementation; however, all
but two of the recommendations will be implemented.The IRS will conduct a study to determine if
standards are needed for the recommendations that address tax return preparation
software and delivery options for refund settlement products for the unbanked
taxpayer.

The IRS acknowledges that it
does not know how many paid preparers exist and cannot determine the full
extent of noncompliance and incompetence within the tax practitioner community.
This lack of information hinders the
IRS’ efforts to expand its outreach and education initiatives and to identify
potentially problematic preparers.Pursuing abusive preparers is part of the IRS’ strategy to reduce the
tax gap.While it is too soon to comment
whether the suggested recommendations will meet the IRS’ objectives, the
recommendations are an effective step in engaging the tax preparer
community.The overall estimated cost in
conducting the Review is $1.3 million, which includes costs for 2 Federal
contractors to provide research and project management activities.The IRS did not consider opportunity costs for
the Return Preparer Review and funded the Review from its FY 2009 available and
unallocated funds.Also, IRS management stated
that existing IRS programs were not negatively impacted (from a resource and
productivity perspective) by the undertaking of the Review.The TIGTA is currently conducting a review[9]
to evaluate the IRS’ efforts to implement the Review recommendations by the
2011 Filing Season.

Existing measures will
not provide IRS executives with data needed to evaluate if the IRS is fairly
applying penalties or effectively leveraging research to identify fraudulent
tax return preparers.

The
IRS’ FYs 2009–2013 Strategic Plan does not contain sufficient measures that
will be useful for monitoring its performance in achieving IRS goals and
objectives to engage the paid preparer community.For example, the existing measures will not
provide IRS executives with data needed to evaluate if the IRS is fairly
applying penalties or effectively leveraging research to identify fraudulent
tax return preparers.We discussed the
importance of having useful performance measures with IRS personnel and were
advised that specific measures were not needed because the broad measures
included in the plan would provide the information needed to assess
performance.Figure 2 depicts the IRS’
existing plans for measuring performance to achieve the goals outlined in its
Strategic Plan.

Figure
2:The IRS’ Long-Term Measures to
Monitor Performance

Measures

Description of Measures

Voluntary Compliance
Rate

Measure
the amount of tax that is paid voluntarily and in a timely manner as a
percentage of the corresponding estimate of true tax liability.The compliance rate reflects the impact of
nonfiling, underreporting, and underpayment combined.

American Customer
Satisfaction Index

Monitor
the American Customer Satisfaction Index score related to the electronic and
paper filing processes for individual income tax returns.

E-File Rate

Measure
the percentage of all major tax returns filed electronically by individuals,
businesses, and tax-exempt entities.“Major” tax returns are those on which filers account for income,
expenses, and/or tax liabilities.

Taxpayer Satisfaction With
IRS Services

Administer
surveys across all types of service to assess whether the taxpayer’s issue
was resolved in a reasonable timeframe.

Enforcement Contacts

Track all
enforcement contacts including audits, notices, and Automated Underreporter
Program work to arrive at a more complete measure of coverage rate.

Analyze
and estimate the number of individuals who do not file income tax returns but
have an obligation to file an income tax return.

Source:The IRS’ FYs 2009–2013 Strategic Plan.

Paid tax return
preparers are a critical component and stakeholder in tax administration and
represent an important intermediary between taxpayers and the IRS.They are also an important component in IRS
efforts to close the tax gap.In
addition, the tax return preparer community provides a unique opportunity to
affect taxpayer behavior and compliance with the tax laws.Without specific measures and a process to
obtain needed data, the IRS will not be able to monitor the effectiveness of
its strategies to engage paid preparers and their role in reducing the tax gap.

Performance measures were
excluded from the business divisions’ and functional offices’ plans and
business performance reviews

The IRS business divisions’ and functional offices’ business
performance reviews and plans did not always include outcomes, outcome
measures, baselines, or targets that could be used to measure if actions taken
would achieve objectives in the IRS Strategic Plan.We reviewed 10 business divisions’ and
functional offices’ plans and business performance reviews for the two
strategic plan objectives related to paid preparers and identified the
following:

Five
of the 10 had all the measures needed for the Strategic Plan objective to
strengthen partnerships with tax practitioners, tax preparers, and other
third parties to ensure effective tax administration.

Two
of the 10 had all the measures needed for the Strategic Plan objective to
ensure that all tax practitioners, tax preparers, and other third parties
in the tax system adhere to professional standards and follow the
law.

The Government Performance and Results
Act of 1993was enacted to bring to Federal
Government agencies more accountability in how they spend their budgets and how
well they fulfill their public service roles.It requires strategic plans to include a mission statement, general
goals, objectives, and strategies and measures.In addition, the Government Accountability Office guidelines require top-level
reviews of actual performance and the establishment and review of performance
measures because it is critical that plans have a method to measure the
progress and expected outcome of goals and actions.The availability of this data in the IRS Strategic
Plan and in the business divisions’ and functional offices’ plans and business
performance reviews will improve their usefulness and provide information
needed to make better management decisions.

As
the IRS moves forward with it plans to implement the Return Preparer Review
recommendations, it is critical that it considers our results and takes the
necessary steps to document methods to measure and monitor the progress and
expected outcomes for the planned strategies.The initial care exercised will enable management to better evaluate the
success of its goals and objectives.Furthermore, the concept of accountability for use of public resources
and government authority is a key component to our nation’s governing
processes.Legislators, government
officials, and the public need to know whether government programs are
achieving their objectives and desired outcomes.

Recommendation

Recommendation
2: The Chief Financial
Officer should define and include in the IRS Strategic Plan
sufficient measures that will provide data that can be used to monitor the IRS’
efforts to achieve objectives aimed at strengthening partnerships with tax
practitioners and paid preparers to ensure effective tax administration. This effort includes coordinating with the
business divisions and functional offices to ensure their plans and/or business
performance reviews include acceptable measures to assess their progress in
achieving the expected outcomes of goals and actions which support the IRS
Strategic Plan.

Management’s
Response:
IRS management agreed with this recommendation and will
include in the IRS Strategic Plan measures to assess progress in achieving the
expected goals and objectives that support the IRS Strategic Plan.

Office
of Audit Comment:While IRS management agreed with the
recommendation, the planned corrective actions did not address modifying the
existing Strategic Plan to include sufficient measures that will provide data
that can be used to monitor IRS efforts to achieve objectives aimed at
strengthening partnerships with tax practitioners and paid preparers.For example, we reported that the IRS does not
have a measure to evaluate if the IRS is fairly applying penalties or
effectively leveraging research to identify fraudulent tax return preparers.Also, IRS management did not
address how they plan to coordinate with the business divisions and functional
offices to ensure their plans and business performance reviews include
acceptable measures to assess their progress in achieving the actions/goals specifically
for the tax preparer community.Finally,
IRS management agreed to assess the progress in achieving the expected goals
and objectives which support the Strategic Plan; however, they did not clarify
if the assessment will include all or some of the goals and objectives in all
business divisions and functional offices.Without an effective process to monitor its performance, the IRS cannot
ensure its programs are achieving their objectives and desired outcomes.We followed up with IRS management to clarify
and provided them the opportunity to reconsider their response; however, we
were advised that their position remained the same.

The overall objective of this review was to evaluate the
IRS’ efforts to engage the tax practitioner community in a productive
partnership to reduce the tax gap.[10]To accomplish the overall objective, we:

I.Determined whether the IRS Strategic Plan for FYs 2009–2013 was sufficient for items
such as goals, objectives, and quantifiable measures to engage the tax
practitioner community to reduce the tax gap.

A.Discussed with the IRS office of the Chief Financial
Officer the development of the Strategic Plan.

B.Reviewed the IRS Strategic Plan for FYs 2009–2013 to determine if it
included the information that was missing from the FYs 2005–2009 Strategic Plan.

C.Determined if the prior recommendations from the TIGTA
FY 2007 audit report[11]
were implemented.

D.Obtained and reviewed documents from the office of the
Chief Financial Officer to determine whether any stakeholders concerns
pertaining to partnering with tax practitioners to reduce the tax gap were
addressed in the IRS Strategic Plan for FYs 2009–2013.

E.Determined whether the plan contained the critical
components required by the Government Performance and Results Act of 1993.[12]

II.Determined if the 10 business divisions and functional
offices[13]
developed plans to support the IRS’ direction to engage the tax practitioner
community to reduce the tax gap, which includes all tax preparers adherence to
professional standards and following the law.

A.Determined if the 10 business divisions’ and functional
offices’ plans addressed and included specifics to support the IRS’ goals
outlined in the IRS Strategic Plan for FYs 2009–2013.

B.Determined if the business divisions’ and functional
offices’ plans included the elements required under the Performance Assessment
Rating Tool.

C.Identified any other programs not included in the
functional plans that engage the tax community to reduce the tax gap and help
ensure adherence to professional standards and the law.

III.Determined if IRS management considered the opportunity
cost of conducting the Return Preparer Review and determined the impact of
diverted resources for the Review on existing IRS programs.

A.
Identified
and interviewed the Review team to discuss the planning and goals for the
Review.

B.
Obtained
and reviewed documentation that addressed the goals/objectives, resource
commitments, impact of the resource commitments on existing IRS programs,
planned efforts/activities, expected outcomes, and milestones for the Review.

C.
Identified
the method the IRS used to monitor the actions/tasks for accomplishing the
Review.

Internal controls methodology

Internal controls relate to management’s plans, methods, and
procedures used to meet their mission, goals, and objectives.Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program
operations.They include the systems for
measuring, reporting, and monitoring program performance.We determined the following internal controls
were relevant to our audit objective:the establishment of a Strategic Plan and its goals and strategies for
relevance to engaging the tax preparer community to reduce the tax gap and the
performance measures needed to assist in assessing the accomplishment of the
Plan goals.We evaluated these controls
by interviewing management and reviewing the current Strategic Plan, functional
plans that support it, and business performance reviews that reflect the IRS’
performance to accomplish its goals and strategies.

Reach out both alone
and in partnership with other IRS operating divisions to all market segments,
including the tax practitioner community, for the purpose of educating
individuals, businesses, and return preparers about the various types of
fraud committed in their industry and how to recognize, avoid, and report it.

Employee Plans

Coordinate with the LeadDevelopmentCenter[14]
in the Small Business/Self Employed Division and the Department of Justice to
protect participants and their retirement funds by working to seek
injunctions against promoters of abusive arrangements.

Exempt Organizations

Conduct reviews of the
activities of exempt organizations using data on file and publically
available information, without direct involvement with the taxpayer.
These reviews may lead to compliance checks, examinations, or followup in a
later year, thus ensuring that compliance is maintained on an ongoing basis.

Large and Mid-Size Business Division

Engage taxpayers and their preparers in the development of the facts
and the issue resolution process, using appropriate tools to timely reach
agreement.

Office of Professional Responsibility

Continue to disclose final case
dispositions on its webpage for reference and guidance.

Small Business/
Self-Employed Division

Identify and act on
emerging schemes through approval and development of promoter penalties,
abusive preparer, and participant cases.

Tax Exempt
Bonds

Continue to utilize the Internal Revenue Code Section6700,
Tax Promoter Penalty, to target the promoters of abusive transactions and the
lack of diligence by market professionals.

Taxpayer Advocate
Service

Explore the role
of preparers in bringing taxpayers into compliance.Identify the types of and causes of
preparer errors and the role of preparers in facilitating noncompliance.

Wage and Investment
Division

Provide improved
training tools through web-based training that links tax law and software
into a single process-based training module.

American
Customer Satisfaction Index – A customer
satisfaction index that relates expectations and evaluations of quality to
customer satisfaction and is an internationally accepted measure of customer
satisfaction used in over 20 countries.

Business
Performance Review– A process
which establishes a framework for measuring, reporting, and reviewing a
business division’s performance against its functional plans established within
the Strategic Planning and Budget process.The Business Performance Review is one of several communication vehicles
used to report quarterly performance measures to the IRS Commissioner’s Office.

Gross Tax Gap – An estimated amount
determined by the IRS of tax liabilities due in Tax Year 2001 before
enforcement efforts and late payments were considered.The estimated amount is $345 billion.The amount of enforcement effort and late
payments totaled $55 billion.The
difference between the two—$290 billion—is the net tax gap.

LeadDevelopmentCenter –Coordinates local and national projects initiated to
identify specific areas/industries of noncompliance.It is the focal point for the fraud referral
program, coordinating all referrals to and from the operating divisions and
providing fraud awareness training to operating division employees.

Opportunity Costs – The benefits forgone by a particular use of
resources.Also, it is the alternative
with the greatest value to an agency that is the next best use of the
resources.

Performance Assessment Rating Tool (PART) –A vehicle for achieving the goals of the
Government Performance and Results Act of 1993.[15]It strengthens
and reinforces performance measurement under that act by encouraging careful
development of performance measures for programs according to the
outcome-oriented standards of the law and by requiring that agency goals
include actions with completion dates and designed to improve program results.

Tax Gap– The difference between
the annual Federal tax obligation and the amount of tax the taxpayer pays
voluntarily and timely.The tax gap
consists of those who do not file their returns, do not make their payments on
time, and file returns but underreport their income or over report their
expenses.

This is in response to your Draft Audit Report, "Plans
Exist to Engage the Tax Preparer Community in Reducing the Tax Gap; However,
Enhancements are Needed (Audit # 200930027).

I am pleased with your acknowledgement that the IRS
Strategic Plan contains objectives critical to reducing the tax gap by engaging
the tax preparer community and that the IRS business divisions and functional
offices have plans in place that show goals, programs and activities to support
the key objectives aimed at the tax preparer community.

The IRS is pleased with both the IRS Strategic Plan
(2009-2013) and the process used to develop it. The plan includes measures that
help the IRS monitor progress toward its long-term goals. The IRS tracks
hundreds of metrics to ensure effective operations at all levels of the
organization.

If you have any questions, please contact Peter Rose, Acting
Associate CFO for Corporate Planning and Internal Control, at (202) 622-4508.

Attachment

Attachment

RECOMMENDATION 1

The Chief Financial Officer should take steps to update the
existing IRS Strategic Plan and ensure future strategic plans have all of the
information in the plans as required by the Government Performance and Results
Act of 1993 (GPRA) and Office of Management and Budget Circular A-11
(Preparation, Submission and Execution of the Budget).

CORRECTIVE ACTION

Ensure future strategic plans incorporate the requirements
in Department of Treasury guidance which includes both GPRA and Circular A-11.

The Chief Financial Officer should define and include in the
IRS Strategic Plan sufficient measures that will provide data that can be used
to monitor the IRS' efforts to achieve objectives aimed at strengthening partnerships
with tax practitioners and paid preparers to ensure effective tax
administration. This effort includes coordinating with the business divisions
and functional offices to ensure their plans and/or business performance
reviews include acceptable measures to assess their progress in achieving the
expected outcomes of goals and actions which support the IRS Strategic Plan.

CORRECTIVE ACTION

Include in the IRS Strategic Plan measures to assess
progress in achieving the expected goals and objectives which support the IRS
Strategic Plan.

[4] The
Chief Financial Officer’s Corporate Planning and Internal Control staffleads
the development of the IRS’ Strategic Plan and the processes for determining,
collecting, analyzing, reviewing, reporting, and communicating the measures of
IRS-wide performance, as well as integrating performance and cost information.

[13] The 10
offices are:the Criminal Investigation
Division; the Large and Mid-Size Business Division; the Office of Appeals; the
Office of Professional Responsibility; the Taxpayer Advocate Service; the Wage
and Investment Division; the Small Business/Self-Employed Division; and the
Employee Plans, Exempt Organizations, and Tax Exempt Bonds functions of the Tax
Exempt/Government Entities Division.Since the Tax Exempt/Government Entities Division completed separate
annual plans for each office, we counted each office as a separate office.